Availability of Cenvat Credit on partially paid invoices

Sep 16, 2013

ByV. Sivasubramanian

Prior to 2011-12 [see end note 1]
service tax was payable on receipt basis in the calendar month or quarter,
depending on the class of the assessee, immediately following the calendar
month or quarter in which the payments are received towards the value of
taxable services. The payment [see end note 2]
could be by cheque, credit card, deduction from account, issue of credit
notes or debit notes, and also by book adjustments.

Cenvat credit of the service tax paid on an input
service was allowed [see end note 3]
upon such payment, on the basis of the invoice raised. It may be noted that
payment of invoice value and not merely the service tax component of the
invoice, which was a pre-requisite to taking Cenvat credit.

From 2011-12 onwards [see end note 4],
the point of taxation has been moved, broadly speaking, to the date of
invoice or the date of receipt of payment, whichever is earlier. Though credit
is now allowed on the basis of the invoice, even if no payment has been made,
the credit taken needs to be reversed if the payment of value of input service
and the service tax paid or payable as indicated in the invoice is not made
within three months of the date of the invoice. Thus the requirement for
payment of the invoice value rather than only the service tax component has
continued even though an extra time period appears to have been allowed for
such payment.

Two questions arise in this context. Firstly, why
should a law relating to levy and collection of service tax mandate payment of
the full invoice value for allowing Cenvat credit. While there could be a
concern about someone taking credit for an amount beyond what has been paid as
service tax into the treasury, payment of the remaining amount would appear to
be a matter to be settled either between the parties concerned or under a law
governing commerce or business.

Secondly, what happens if the entire invoice value is
not settled in one go? There are varying commercial practices adopted for
settlement of payments amongst parties having regular business dealings. For
example, the commercial practice is to deduct a small percentage (usually
between 5-10%) of the invoice as retention money, to be returned only after
completion of the entire contract. Though the full value of the invoice may be
passed for payment and the value of the works is included by the service
recipient in the value of work-in-progress, etc. the payment is released
against the invoice only after deducting the retention. There could also be net
settlement amongst parties after adjustments for amounts payable to the service
recipient, payments received from third parties on behalf of the service
recipient, etc. What is the legal position relating to availability of Cenvat
credit in these cases?

CESTAT, New Delhi [see end note 5] recently dealt with both the aforesaid
questions while deciding on whether Cenvat credit is allowable on the basis of
invoices where a percentage of the billed amount is retained as performance
guarantee. In this case, the department sought to disallow proportionate Cenvat
credit to the extent the billed amount had been retained. The Tribunal held
that so long as the service
charges as well as the service tax have been paid in any of the prescribed
manners the credit should be allowed.

The Tribunal also partly answered the first question above by holding
that the policy
rationale behind the relevant provisions of the Cenvat Credit Rules [see end note 6]
was to prevent a situation where credit is availed by the service
provider on receipt of invoice, even though he has not paid the service tax for
the reason that there is delay in receipt of payment by him from the service
recipient. But this still does not explain why the invoice value rather than
only the service tax component is required to be paid, nor does it explain why
a similar dispensation is being continued even in the new regime!

It is necessary here to keep in mind that in India,
taxation is not merely viewed as a tool to raise resources to meet budgetary
needs, but also as an instrument of fiscal policy to influence socio-economic
behaviour. Sometimes the legislative provisions cross-reference or reinforce
each other so as to achieve certain common objectives even without explicitly
stating so.

For example, the provisions relating to MRP [see end note 7]
based valuation under central excise law seek to ride on the Legal
Metrology Act, 2011 so as to reduce valuation disputes. However, the penal
provisions for alteration of MRP, etc. under central excise law reinforce the
provisions of the latter Act, thereby enhancing consumer protection.

Similarly, denial of Cenvat credit under service tax
provisions in case of non-payment of the invoice value within prescribed time
limit could be part of policy disincentives against delays in payments to
Micro, Small and Medium Enterprises (MSMEs). The Government has stipulated
provisions for timely and prompt payment for the goods and services supplied by
MSMEs under the MSMEs Development Act, 2006 [see end note 8].
Such timely payment also lowers the credit risk to MSMEs which may even
be granted collateral free loans in terms of RBI guidelines [see end note 9].
However even this unstated explanation is only partial as it still does
not explain such mandate for non-MSME cases.

In any case, it is a settled principle that a notification/rule is to be construed according to its language and
there is no room for intendment while interpreting it. Hence it can be said
that the questions relating to availability of Cenvat Credit on partially paid
invoices have not been settled as yet.

Refer Explanation to Section 67 of the Finance
Act, 1994. In the case of associated enterprises, debit or credit to any
account (even if it be a suspense account) in the books of a person liable to
pay service tax, shall amount to payment.

Under Rule 4(7) of the
Cenvat Credit Rules, 2004.

Under the Point of
Taxation Rules, 2011 notified effect with effect from 1-4-2011.

Order No. 56583/2013 dated 15-5-2013 in the
case of Hindustan Zinc Limited.

As they existed during the period prior to
2011-12

Maximum Retail Price

As per Section 15 of the said Act, the buyer is
required to make payment on or before the date agreed upon with the supplier
or, where there is no such agreement before the appointed day. The agreement
between seller and buyer shall not exceed more than 45 days. The delayed
payments are subject to compound interest with monthly rests at thrice the Bank
Rate notified by the Reserve Bank of India.